space x The company is on a fast track to join several major stock indexes, potentially rooting its stock performance in the tech sector’s broader fundamentals.
But market forces, amplified by equity-based derivative securities and maneuvers by big-money investors, could drive the stock price significantly higher before SpaceX is included in these indexes in the coming weeks. Less than three days after going public, SpaceX has already soared 55% above its opening price of $135.
These financial industry factors have little to do with SpaceX itself, its various industry segments, or the broader economy.
“It’s going to be very hard to be negative about this name, at least until it’s in the Nasdaq 100 index,” Dan Niles, founder of Niles Investment Management, told CNBC on Monday. “Then things like valuation become important, but as we learned with the meme stock craze, valuations can always be much higher than you think.”
Demand is high but inventory is low
Until then, the basic problem is that there is a high demand for stocks in addition to a low amount of stocks available for trading. Just 555.6 million shares were sold in last week’s IPO, representing about 5% of SpaceX’s outstanding shares. An additional 83.3 million shares will become available as a result of the customary 15% overallotment option granted to the underwriters.
About 911 million insider shares, double the number of shares publicly traded today, are expected to go public two days after the company’s first earnings report, which is not expected until early August, according to Morningstar.
Legal restrictions prevent insiders from selling yet, and many institutional investors who have just bought shares are also reluctant to sell.
Out of stock
This scarcity is driving up prices ahead of SpaceX’s inclusion in the FTSE Russell, MSCI, and Nasdaq 100 indexes in the coming weeks.
Upward pressure is building this week as derivatives and other types of secondary financial instruments related to SpaceX begin operations.
Option trader Michael Ko told CNBC that SpaceX stock options started trading in heavy volume on Tuesday.
“Every time a market maker sells a call, they buy (a certain number of) shares of the underlying stock because that hedges their exposure to some extent,” he said. “That very act is putting buying pressure on the stock.”
Hedge funds and other big money players are also likely stocking up on stocks to sell back to the market as the index is forced to buy in the coming weeks.
“We hypothesize that price pressure is generated by hedge funds, arbitrageurs and other sophisticated participants anticipating demand for passive trackers and collectively buying up entrants in advance,” analysts at Switzerland-based Concretetam Research wrote in a paper last week.
In addition, SpaceX began trading on Monday in an exchange-traded fund (ETF), a fund that uses borrowed capital to multiply stock price movements by investing in further derivatives, futures and swap contracts. For example, Direxion announced the introduction of the Daily SpaceX Bull 2x ETF on Monday.
Big companies, small floats
This type of technical pressure can continue even after a company joins a benchmark index, with volatile stocks like SpaceX potentially distorting the prices of smaller stocks.
“When this mechanical, price-agnostic passive fund buying collides with constrained public equity, it creates severe liquidity strains,” Payal Shah wrote in a June 10 memo to CME Group. “This could lead to significant price distortions, forcing passive funds to buy stocks at high valuations immediately after listing.”
Analysts expect that once SpaceX is included in various indexes, the stock will become more sensitive to both its sector and broader macroeconomic factors.
“Stock price momentum is likely to be supported by passive capital flows that reflect household savings trends and asset allocation decisions that rely on thematic fundamentals rather than stock-by-stock,” Rothschild & Co.’s George Karamanos wrote in a Tuesday note to clients.
SpaceX stock could also fall significantly after the company received a lot of media attention in the run-up to its initial public offering.
Analysts at Renaissance Macro Research call this the “hype tax.”
IPOs that open with great fanfare can quickly underperform, according to Renaissance, an initial public offering (IPO) research firm.
“Despite enthusiasm, performance was often disappointing, with a median return of -15.6% in the first year of trading, and only eight of the 20 IPOs were profitable after one year,” analysts led by Renaissance’s Jeff DeGraaf wrote in a June 11 analysis.
– Justin Zacks contributed reporting.
